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Federal Reserve Bank of Atlanta
FRB Atlanta Working Paper
Modest policy interventions
Eric M. Leeper
Tao Zha

The authors present a theoretical and empirical framework for computing and evaluating linear projections conditional on hypothetical paths of monetary policy. A modest policy intervention does not significantly shift agents' beliefs about policy regime and does not induce the changes in behavior that Lucas (1976) emphasizes. Applied to an econometric model of U.S. monetary policy, the authors find that a rich class of interventions routinely considered by the Federal Reserve is modest and their impacts can be reliably forecast by an identified linear model. Modest interventions can shift projected paths and probability distributions of macro variables in economically meaningful ways.

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Eric M. Leeper & Tao Zha, Modest policy interventions, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper 2003-24, 2003.
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Keywords: Equilibrium (Economics) ; Monetary policy ; Macroeconomics ; Inflation (Finance) ; Econometric models
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